Ponzi schemes have emerged as a notable form of fraudulent activity within the crypto space, promising high returns that are unsustainable and reliant on new investor capital. These activities are not legitimate, disguising investors to invest in a cryptocurrency that actually does not exist. MicroStrategy, a prominent cryptocurrency software company, has gained significant popularity due to its aggressive Bitcoin (BTC) buying strategy. The company’s increased activity has raised doubts among critics to allege that the company operates like a Ponzi scheme.
MicroStrategy has exploded into financial headlines, rising 50% in the last week and becoming the most-traded stock on the U.S. markets. This significant growth is fueled by the audacious Bitcoin strategy, which has gained both admiration and sharp criticism. While the platform similarities might seem justifiable, a closer look will help to identify significant differences in their mechanics, risks, and sustainability.
This article will examine whether the Bitcoin strategy of MicroStrategy is a Ponzi scheme or not.
What is a Ponzi Scheme and How it Works?
A Ponzi scheme is an investment scam where the fraudsters pay returns to early investors mainly using the funds they collected from new investors, instead of collecting from legitimate business activities or profits. These fraudulent schemes get fuel from the continual influx of new investors who become victims of these activities.
The term Ponzi scheme is named after Charles Ponzi, who disguised investors by promising them high profits from international reply coupons and utilizing the money of new investors to pay earlier investors.
A well-known example of a Ponzi scheme is BitConnect, which is a cryptocurrency platform that attracted investors by promising massive returns through its supposed trading algorithm. BitConnect depends on new investor funds to pay off early investors. The scam collapsed in early 2018 and erased billions of dollars in investor wealth.
Let’s Look at the Workings of a Ponzi Scheme
The Perpetrator: The perpetrator convinces an individual to invest in a fraudulent scheme that promises unusually high rates of returns.
Early Investors: The early investors get the promised profits through the money collected from the more recent investors.
More Recent Investors: More and more individuals join the scheme as more people are deceived into thinking that the scheme is legitimate.
Newest Investors: More people will join the scheme as the scheme gains popularity. However, once the joining flow runs dry, investors will no longer be able to receive returns or even their invested amount back.
Is MicroStrategy’s Bitcoin Strategy a Ponzi Scheme?
The doubt has been raised due to its current pattern. MicroStrategy is currently raising capital by issuing shares and taking on debt, leveraging the proceeds to purchase Bitcoin, and depending on the price increase of Bitcoin to boost its stock valuation.
If the price of a digital asset is high, it will help the company to secure more capital, continuing the cycle.
The Bitcoin Strategy of MicroStrategy
Phase 1: The company will issue shares and take on debt.
Phase 2: Leverage the raised capital to purchase Bitcoin.
Phase 3: The price of Bitcoin increases.
Phase 4: The price of stock increases.
Phase 5: Higher Valuation enhances access to capital.
Critics argue that this activity rewards early investors at the expense of those who join afterward. If the price of Bitcoin declines, MicroStrategy could possibly experience pressure to sell its holdings, hence breaking the cycle. In such a situation, the price of the stock also declines, leaving recent investors with huge losses.
MSTR Regulatory Compliance and Transparency
MicroStrategy is a public company that adheres to strict financial reporting rules. It quarterly files and creates reports annually with the Securities and Exchange Commission(SEC) providing details of its Bitcoin holdings, debt, and other key financial metrics.
This stringent regulatory authority makes sure that MicroStrategy follows securities law developed to safeguard investors. This strict governance and adherence to rules restrict insider manipulation. MicroStrategy uses its raised capital to expand its Bitcoin portfolio. Financial filings appropriately outline this strategy and show where the funds are directed.
On the other hand, Ponzi schemes do not undergo any audits and no central authority will be there to monitor them. The fraudsters forge information and manipulate investors by showing them forged and misleading financial statements.
MicroStrategy always educates investors about the risks associated with its business model and also indicates these risks in its filings, ensuring a long-term goal without making any assurance. On the other hand, Ponzi scheme operators guarantee unrealistic profits without revealing the true nature of their fraudulent schemes.
Finally, Ponzi schemes usually end up with either continuing the scam or absconding with the money collected from investors. In the case of MicroStrategy, it’s different. If MicroStrategy wants to sell its whole Bitcoin holdings, the proceedings will still belong to the company. The money will remain on the balance sheet of the company and be available for strategic utilization.
MicroStrategy ensures the security of its digital assets by putting its Bitcoin holdings under the U.S.-regulated custodians. The company conducts through research about the custodian over 6 to 18 months. Before selecting, the company will review licenses, financial records, and operational capabilities to ensure that the custodians are capable of safeguarding the assets under any circumstances.
For additional support, MicroStrategy employs a multi-signature cold storage. It requires multiple approvals from trusted parties before any Bitcoin can be transferred.
Also Read: What is Ponzi Scheme…?
Conclusion
As we discussed above, the Bitcoin strategy of MicroStrategy is not a Ponzi scheme. MicroStrategy is a renowned cryptocurrency software company that does not cheat its consumers. Ponzi schemes can be simply detected by continuous monitoring and analyzing. MicroStrategy does not allow any single individual to access its entire reserve. Even the executives working at MicroStrategy are not able to access the holdings. Any violation of that duty could result in legal actions, including lawsuits and criminal charges. Also, MicroStrategy undergoes regular audits by central authorities to ensure investor protection. A Ponzi scheme does not have any regulatory authority. So, let’s say that MicroStrategy’s Bitcoin strategy is legitimate and not a Ponzi scheme.